A time capsule of the greatest financial mania in the history of mankind, told in real-time by regular folks and patriots. May future generations better understand the madness of crowds, and how power and money corrupt.

December 24, 2006

40 comments:

Mark in San Diego (sometimes)
said...

After studying economics for over 35 years, I am as perplexed as anyone about the debt explosion. My father back in the 1960's was already preaching gloom and doom about credit outstanding. Remember in those days stores mostly carried their own credit, and a lot of people were in debt to local merchants. . . .we have perhaps heard to song, "owe my soul to the company store."

My best guess is that there will NOT be a meltdown (at least not all at once like 1929), but instead we will see a depreciated dollar (hence inflate away the debt), sub-prime mortgage holders being foreclosed upon, and moving back in with mom and dad, a few hedge funds collapse, a few banks collapse (with forced mergers with stronger banks), and even some international bailouts - China still wants a market to sell Chinajunk (tm).

Spending Christmas once again in Zurich, let me tell you, the bankers and insurance people here are in "high clover" as my Aunt from North Carolina would say. . .London and New York - ditto. . .financial bonuses are at record levels. . .the money just continues to flow from the have-a-little's to the have-it-all's. . .we are certainly in a new era of Feudalism. . .

Why pay it back? Our society has pushed the limits on debt and there is no turning back. Borrow as much as you can and just make the monthly payments.This is what it has all become.Who is going to make us pay it back?Why should we pay it back?This is the new economic model. They can't grow the economy through job creation so they do it through debt creation.

Saw the new clint eastwood wwII movie yesterday and the big push was to talk americans into buying war bonds - a worthy cause back then

now we are fighting a trillion dollar war, we're deficit spending in the hundreds of billions so our rich people can get a tax break they don't need, and we suckered the rest of the world into buying our bonds to fund it all

Inflation seems to be the path of least resistence. Metrics on inflation will be modified as skillfully as possible to try to disguise the full scale of the inflation. As long as the fed can keep it from running out of control then 5 or 7% inflation for a few years might allow us to escape from this credit bubble.

Though I believe we are in a bubble for credit and housing, when I play devil's advocate and try to think of ways that we will avoid a full-scale meltdown, inflation is the one possibility out there.

And it makes me angry because it discourages prudent saving and fiscal responsibility and restraint while rewarding the instant gratification of debt-financed purchases.

An interesting one is actually leveraging this up by some financially smart home owners. If you have a non-recourse home loan - and have cash and so no real concern about a ruining of credit and the property has dropped significantly, say 40% then there is nothing to stop you using jingle mail, let them foreclose, get out of paying back your loan (non-recourse loan otherwise it doesn't work ) that's 130% say of property value and buying a similar property, for cash of course at that 40% discount. Yup, you pay taxes on this "gain" of course but its still ok. Interesting idea!

Also, all of the below in varying proportions:

0. debt transfers to some government entity - delinquent loans get sold to the govt by the lenders for say 80cents on the dollar. The taxpayer is in effect on hook for the rest, a la S&L rescue.

1. debt liquidation - the lenders will take some of the pain, the borrowers get off scot-free, save for ruined credit.

2. conversion of delinquent debt to equity by the lenders via outright ownership changes to rental, "leases", fig-leaf remortgaging terms of 50 years so we can all pretend you are a home owner but its still really just renting - All this guaranteed and underwritten by some government agency.

Euro/Swiss/Jap Banker:Yeah uhm Uncle Sam, we need that $10 trillion we lent you back

Uncle Sam:Hmm you know what, I'm totally tapped dude, sorry can't help you out just now

Euro/Swiss/Jap/Banker:What the fuck? What did you spend $10 trillion on?

Uncle Sam:Well for one, we built all these cool planes, satelittes, bombs, this shit is fucked up nasty. We can blow up for example a specific cafe in Paris with a flick of a switch from North Dakota, that's how fucked up this shit it. That alone cost up $80 billion to develop. Then we put these satellites out there that can tell us what the Japanese prime minister's first shit in the morning looks like, that was like another $400 billion.

Euro/Swiss/Jap/Banker:Right, OK, uhm you know what, why don't you just pay us back when you get a chance, or not, you know whatever, we're cool.

Uncle Sam:Hey as long as you're here, I have my eye on that new iPod but you know like I said I'm a little tapped out, can one of you guys spot me $1K?

You borrow a little, the bank owns you, you borrow a whole lot, you own the bank ... and we borrowed so freaking much ... when the bank (chinese, japs, arabs and foreign investors) collapses, we are almost in the only position to "help them" by loaning some of their own money (by printing it of course). Good buy inflation, welcome hyper stagflation. AKA economic paralysis.Cool.Cow_tipping.

I think you have it right. The questionis though, will we have disinflation first?And if so, how do we time that? How hardwill it hit the mining and energy juniors?GLD and SLV? These are the technical issuesthat will make or break.

There is no way that we can "inflate" our way out of this debt. What every seems to be missing is that the federal government is going to continue to borrow. Unless spendng is cut drastically, they will just have to borrow more dollars, worth less, to pay for the same basket of goods. Since our government sees the need to increase spending 3 to 4 times faster than the economy is growing, it will just continue to rack up an unsustainable amount of debt. Additionally we will see a dramatic decrease in our standard of living. 5 or 6 percent inflation means that I will be able to purchase 5 or 6 percent less of what I am acustomed to. It should be an interesting time for politics since there is no easy way out. Do nothing and people get pissed because they won't be able to buy more crap. Increase taxes or cut government and people will bitch because they won't be getting the services that they are accustomed to.

This is called the carry trade. It is a no brainer, Slam dunk-mission accomplished.

Switching gears, you will notice that 'giant 120 meter ski jump' of a debt chart you posted all started when Nixon took the US off the gold standard in 1971 thereby making all foreign debts of the US payable in dollars-paper dollars.

What I am attempting to show is as long as the world accepts dollars as the world currency, deficits apparantly do not matter, for if they did; Japan with its national debt of 165% of GDP wouldhave/shouldhave gone BK long ago.

What I do not understand is this, since deficits apparantly do not matter, and the US has the reserve currency of the world, then why doesn't helicopter ben drop us all a cool million for each citizen thereby really stimulating the worldwide economy and domestic consumption? Just think we then could all afford a MCmansion and a lennar crakerbox too for a vacation home. LOL

The govt will continue to print as much money as they can, what will stop them? Their inflation numbers are so bogus a school child could do a better job.So what stops them from simply just printing more money to pay off debts?It is just paper anyway, confidece in our system.If you took your dollar to the government about the only thing they could give you is a bond or a smile.Gold could have been theoretically exchanged for your dollar in the old days and then used in other economies.The dollar is simply used to keep us minions competeing against each other and thus produceing superior goods, technology and weapons of course.It is all about competition. You can go live out in the forests and survive without dollars. But the govt has created the idea that those people are losers and are thus sterotyped by society as such.Our success in this society is clearly based on how much dollars we make.Do those people in the mcmansions really care about the people in the ghetto? Hell no in most cases.They don't even want to go into their neighborhoods or have their children interact with those people.The dollar is also used by the government to track how much you make so they can collect taxes.

Just imagine yourself on an island and you wanted to grow an economy where people don't need to barter. You need something people can exchange freely that has value because they know you can get supplies with it.So someone creates paper money that is universally known to be backed by value in gold, diamomds etcetera.Will he ever go to that someone and demand his gold or diamonds, no he will give or spend the dollar to the next guy who has confidence in the system.The dollar theoretically could be passed on for eternity and never be redeemed.And for createing the paper money the creator gets a cut of every exchange to help maintain the island. But what happens when the creator takes away the gold or diamonds backing up the value of your paper money? Now all you have is confidence the creator will take care of you.

So your chart basically reads that the 'gipper' Ronald Reagan trilled the US national debt during his term, and that was more than triple over the last 200 years in american history? Amazingly historians seem to place reagan towrds the top of all presidents in ratings. Me thinks there will be adjustments to this downwards as time goes by.++++++++Man, I hope so. The "Gipper" was one of the worst Presidents our country ever had, and I'm tired of the way people have canonized him as some kind of "great leader."

Last time I checked the president does not spend any money. Congress writes spending bills, each and every one of them. From 1954 ot 1994 Democrats controlled Congress, including the 1980s during which the debt skyrocketed.

"The Fear Economy: We thought that the Great Depression couldn't happen again. But could it?"Written By Paul Krugman, 09/30/01 AND EVEN MORE RELEVANT FIVE YEARS LATER:

"Here's my nightmare: America's recovery from its current slump [2001], whenever it comes, is tentative and short-lived, because the business investment that drove our boom in the 1990's remains stagnant. Eventually the housing bubble bursts and we have another slump; then we have another weak recovery, this time driven by deficit spending, but that, too, fades out. Eventually we look around and realize that it's 2009, and the economy still hasn't fully recovered from the slowdown that began at the end of the previous decade."

Is it really credible that a property worth 450K will be worth 2 million in 2012, in REAL TERMS ? The trend is just not sustainable. In brokerese, "trees don't grow to the sky".

Its same ole' same ole'. I did the same analysis with AOL, with Krispy Kreme. With KK, I seem to recall that the inflated P/E ratio at their height implied that every American ate a KK donut every 2 days...

Dollar devaluation,resource giveaways to foriegn countries,tariffs,fines,slavery,and then a bloody drawnout war to cover-up the loose ends ,and dissagreements to finally starting over with the Amero.See,easy.True story.

President's write budgets, Congress authorizes spending. Reagan's budgets asked for even MORE spending than Congress authorized. AND, the Senate was under REPUBLICAN control for 6 of the 8 raygun years.

When a borrower nation defaults or defrauds a creditor nation, it can sometimes lead to a war. Just a little thought there. I don't think we'll default - taxes will go way up before that happens. But, I can imagine that some of our elected huksters at the top might try hustling the east by paying them back with a steeply devalued currency.